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announced last year that it would end its staggered five-year remedial amendment cycle system for individually designed retirement plans under the determination letter program due to budgetary constraints and a lack of resources. The remedial amendment cycle system had allowed plan sponsors to have the IRS approve the plan document language of their individually designed plans at regularly scheduled intervals. The cancelled program provided plan sponsors with significant legal protections, encouraged compliance with required changes in the law, and gave sponsors a blueprint for following the terms of the plan in operation. Many problems—and no apparent solutions—have resulted from the loss of this valuable program.
The Current Law
Currently, other than for Cycle A filers, no new filings based on the five-year remedial amendment cycle system will be accepted; Cycle B, C, D, and E filers are no longer able to obtain a favorable determination letter every five years. If an employer’s employer identification number ends in a “1” or “6,” then it is a Cycle A filer. Certain controlled groups with multiple individually designed plans on different cycles could elect into Cycle A, but the IRS is now requiring that such an election have been made by Jan. 31, 2012, to be considered a Cycle A filer. Cycle A filings are due Jan. 31, 2017.
The IRS still permits individually designed plans to make determination letter filings whenever a plan is established or terminated. When a plan is established, a filing may be made at any time; when a plan is terminated, a filing must be made within 12 months of the termination. With respect to times occurring between these events, the IRS has requested comments on when it should permit determination letter filings for individually designed plans. In addition, the IRS issued
guidance invalidating the expiration dates on favorable determination letters issued prior to January 4, 2016; moreover, the IRS will
issue subsequent favorable determination letters without an expiration date.
Discontinuing the ability of plan sponsors to regularly file determination letter applications is a loss that cannot be understated. Both legal and practical problems arise when plan sponsors cannot regularly have their form of plan qualification reviewed and approved by IRS.
Legally, the IRS must rewrite and harmonize the law surrounding favorable determination letters. The IRS must address the interaction between determination letter filings and the
Employee Plans Compliance Resolution System (EPCRS), remedial amendment period regulations, and Internal Revenue Code section 7805 relief.
EPCRS requires plan sponsors to have received a favorable determination letter in order to use self-correction for significant failures and, in limited circumstances, self-correction by retroactive amendment. In addition, making certain EPCRS corrections for missed amendments compel a plan sponsor to submit new a determination letter filing in the next “on-cycle” submission period. Yet this type of determination letter filing is no longer accepted.
Under the remedial amendment period regulations, a plan’s remedial amendment period is extended automatically until the 91st day following the issuance of a favorable determination letter. This extension, however, will no longer apply to individually designed plans except for determination letter filings related to initial plans or terminating plans.
Section 7805 relief historically provided reassurance to plan sponsors regarding plan language under a favorable determination letter. The plan sponsor could confidently administer its plan in accordance with the plan’s terms through reliance on a favorable determination letter. Section 7805 relief is effectively eliminated for individually designed plans.
In practice, plan sponsors, banks, and insurance companies rely on favorable determination letters for daily administration, corporate transactions, and exemption from certain securities registrations. Much of that reliance is premised on the issuance of current, regularly scheduled favorable determination letters.
The IRS has stated that determination letter filings for individually designed plans are still available upon the establishment and termination of a plan. However, it is uncertain whether the IRS will permit additional determination letter filings for individually designed plans during the lifespan of a qualified retirement plan, offer additional support or resources to ease the impact of the loss of regular favorable determination letters, or modify the rules and consequences surrounding the timing of plan amendments.
A partial solution to limit liability may be for plan sponsors with complex provisions to seek advice as to the qualified status of their individually designed plans.
Regardless of how the IRS chooses to proceed, the cost and liability associated with maintaining individually designed plans will significantly increase. At this point, neither employee benefits practitioners nor the IRS knows the full impact of losing regular determination letter filings on individually designed plans. All we can hope is that the IRS understands the difficult burden now placed on plan sponsors and that it will endeavor to ease that burden as much as possible.
David S. Rosner, a shareholder in
Ogletree Deakin’s Washington, D.C. office, devotes his practice to a variety of plan design, compliance, and administration issues in matters relating to employee benefits and related areas of tax law. Kevin L. Burch, of counsel in the firm’s Indianapolis office, primarily focuses his practice on three major areas of employee benefits—executive compensation, health and welfare and retirement plans. © 2015 Ogletree Deakins. All rights reserved. Reposted with permission.
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